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Impact of Direct Tax Code on Salaried Individuals

So, it is finally here! After months of deliberations and tweaks, the much-awaited Direct Taxes Code (DTC) will replace the age-old Income Tax Act from April 1, 2012. So how will the new DTC impact you and me and the millions of salaried individuals in this country? Let us see!

Personal taxation slabs: A disappointment!

While there was widespread cheer about the proposed personal taxation slabs in the original form of the DTC when it was proposed last year, the current DTC act wears an insipid look. It has nothing major to offer on personal taxation slabs except that men, women and Hindu Undivided Family (HUF) will now face Rs. 2 lakhs of tax free exemption.

This is how the new tax slabs in DTC will look. There will be no tax up to Rs 2 lakh. There will be 10% tax on income between Rs 2,00,001 and Rs 5 lakh; 20% tax on income between Rs 5,00,001 and Rs 10 lakh; and finally 30% tax for income above Rs 10 lakh.

The Fate of Deductions!

Perhaps the worst hit in the new DTC has been the deductions category. Some of the details of the deductions are still not clear. Currently, under the Income Tax Act, a salaried individual gets an annual deduction of Rs 1 lakh under 80C. Under the new DTC Bill, this limit has been raised to Rs. 1.5 lakh. However, as said above the details of the deductions are still not clear.

For example, under the current IT Act, the deductions of Rs. 1 lakh is applicable on investments in instruments like Public Provident Fund (PPF) up to a limit of Rs 70,000, Provident Fund (PF), New Pension System (NPS), and Equity Linked Savings Schemes (ELSS), and when you pay up for the premium for pure life insurance or Unit Linked Insurance Policies (ULIP). Also included in this bracket is the repayment of the principal amount of your home loan, investing in National Savings Certificate (NSC), or fixed deposits with a maturity of 5 years, and when you pay tuition fees for full-time education up to 2 children.

Apart from the above, a salaried individual can also get an additional deduction of Rs 20,000 when he/she invests in certain notified infrastructure bonds falling under Section 80CCF and Rs 15,000 as deduction towards medical allowance under Section 80D.

Under the new DTC Bill, the government has retained the tax eligibility of the above mentioned investments under Exempt-Exempt-Exempt (EEE) category which simply put means tax exemption at the time of entry (investment), accumulation and exit (withdrawal).

However, it is still not clear if investing in instruments like ELSS and ULIP premium will be covered under tax exemption. Even if eligible, it will be under the EET category which means that the tax exemption will be applicable only at the time of entry (investment) and accumulation and will become taxable at the exit point or withdrawal.

Similarly, under the new DTC scheme, the deduction applicable when the principal amount of home loans is repaid will not be there.